Asian currencies dip

Asian currencies fell on Friday as the dollar strengthened after a cautious European Central Bank signalled that any interest rate hike is still distant. Except for Thailand, Southeast Asian financial markets were closed on Friday for public holidays. On Thursday, the ECB said it will end its massive bond purchase scheme by the end of this year, as expected, but the central bank also indicated it would keep interest rates steady at least through the summer of 2019.
The ECB's moves contrasted with those of the Federal Reserve, which one day earlier increased US rates and signalled there could be two more hikes this year. The dollar index, measuring it against a basket of six major peers, gained about 0.2 percent to a two-week high of 94.973, after rallying more than 1 percent the previous day.
Also, investors betting on regional currencies braced for the imposition of US tariffs against China. President Donald Trump has made up his mind to impose "pretty significant" tariffs and will unveil a list targeting $50 billion of Chinese goods on Friday, an administration official said. Beijing has warned that it was ready to respond. "Still waiting for the dust to settle on US-China trade before taking a strong view on local currencies," said Stephen Innes, head of Asia-Pacific trading for Oanda in a note.
"But with the dollar ratcheting higher vs most of G-10, it would suggest there is Asia FX pain in the making." The South Korean won fell nearly 1 percent, at least partly in reaction to the divergence between Fed and ECB paths. The Bank of Korea, which held interest rates steady for a sixth straight month in May, is seen as unlikely to hike in the near term given the economy's recent weak performance.
China's yuan fell to a near two-week low after the central bank fixed the official midpoint at the lowest in five months. Weaker-than-expected Chinese activity data for May and US trade threats also undermined the currency The May data suggests the PBOC "will be in little rush to match the Fed hike, so expect more yuan weakness to ensue," said Oanda's Innes. The Bank of Japan maintained its ultra-loose monetary policy on Friday and downgraded its view on inflation in a fresh blow to its long-held 2 percent price goal, further complicating the central bank's path to rolling back its crisis-era stimulus.
The dollar edged up 0.1 percent to 110.720 yen after rising 0.25 percent the previous day. The Thai baht fell 0.86 percent, while the Indian rupee fell about 0.5 percent on the day. This week's Fed's moves have prompted fears of new capital outflows from the region. Foreigners have sold about $900 million worth of Asian stocks so far this month to take this year's tally to about $16 billion, data from seven stock exchanges showed. That compares with about $20 billion of inflows for all of 2017.